Rising protectionism, the focus on fiscal stimulus and rate increases from the US Federal Reserve would have a major impact on investment returns in 2017 and investors are better advised to diversify their yield avenues, analysts said.

“Seismic geopolitical events, most notably the Trump presidency and Brexit surprises, marked 2016 as a game-changer across the geopolitical landscape, with significant implications for economies and markets alike,” said Rick Lacaille, global chief investment officer for State Street Global Advisors (SSGA), the asset management unit of Boston-based State Street Corporation.

“Populist politics and anti-globalisation sentiment have set the stage for significant policy changes in 2017 and beyond,” Lacaille said.

“In our view, some of the leading themes that have served investors well over the past several years are shifting in the face of a changing investment backdrop,” he added.

In specific, one of the leading themes next year is a focus on fiscal policy, as many countries and regions are more inclined to employ fiscal stimulus in 2017, such as continental Europe, UK, Canada, Japan, China, and the US.

However, Lori Heinel, deputy global chief investment officer for SSGA, warned that political tensions could limit the scope and effectiveness of fiscal stimulus, and “the knock on effects” could lead to more volatility and more differentiation between market winners and losers.

Heinel cautioned investors to keep a close watch on the major elections in Europe, as the results could have major ramifications on the euro stability, most notably in France where the Eurosceptic National Front Party has grown in popularity.

Populist politics and anti-globalisation sentiment have set the stage for significant policy changes in 2017

Protectionism is also on the rise globally, which will be a drag on companies with substantial global

exposure, but beneficial for firms within certain industries as they become more competitive domestically, said Dan Farley, chief investment officer for SSGA’s Investment Solutions Group.

For emerging markets, including Asian economies, Trump’s campaign promises indicate a tougher stance on trade and large-scale profit repatriation that would tend to be negative for these countries due to implied US dollar strength and lower export growth, said Farley.

Monetary policy shifts should also be on investors’ radar, as the US Federal Reserve is cautiously proceeding with rate normalisation, while central banks in Europe and Japan have shown some hesitation to extend negative interest rates and asset purchase programmes, said SSGA analysts.

“We anticipate that the US Fed’s interest rate increases should be a boon for financials (in the US stock market) and boost interest margins. But it may also limit sectors such as consumer discretionary that have benefited from an easier borrowing environment,” they said.

They also expect emerging market equities to rise by 6 per cent on average next year due to the stronger growth outlook, as Russia and Brazil emerge from recession and the negative impact of falling commodity prices abate.

However, they urged investors to “underweight” equity positions in the developed European and Asia-Pacific regions.

As far as government bond markets go, the SSGA analysts are of the view that it is not an opportune time for investors to invest in fixed income securities due to their record low yields. They expect a one-year return of 0.3 per cent for US 10-year bonds and a negative 0.3 per cent return for developed market government bonds outside the US.

On the commodity front, oil prices may be range bound with a slight upward bias in 2017 due to a continued supply glut and modest global growth, they said.

However, precious metals, such as gold, should continue to perform well in an environment with “widespread negative global interest rates and a gradual return to higher levels of inflation”, they said.